The Wealth of Nations
Book 4, Chapter 5
Download Preston's Free Checklist
Download Preston's free checklist. His checklist was developed after spending countless hours studying billionaires like, Warren Buffett, Carl Icahn, and Ray Dalio. With his checklist, you can find safe picks that protect and grow your principal. Additionally, Preston reads a lot of books and writes an executive summary for each book he reads. If you download his checklist, you will be added to his monthly e-mail list where he sends his book summaries. There are never any advertisements...ever. Here's an example of one of Preston's executive summaries, based on the book written by Billionaire Charlies Koch.
Chapter 5 Summary
(Digression concerning the Corn Trade and Corn Laws ignored)
Bounties upon exportation are frequently used in Britain, enabling the merchants of certain domestic products to sell their goods as cheaply as their competitors in the foreign market.
Since foreigners cannot be forced to buy a country’s goods, they are encouraged to do so by the use of bounties. In this way, the mercantile system aimed to enrich the whole country by establishing balance of trade.
Bounties should be granted only to those trades which cannot be executed without them. But in every branch of trade in which the price the goods fetch covers the ordinary profits of stock as well as the capital employed by the merchant in preparing and sending the goods to market, bounties are not required.
The only trades that actually require bounties are those in which a merchant is obliged to sell his goods for less than it cost him to bring them to market. The bounty is given in order to make up this loss, thus encouraging him to continue or perhaps trade in goods of which the expense is greater than the returns. If this practice were to continue over a period of time, there would be no capital left in the country.
Trading using bounties is the only situation in which one country is always the loser as it sells its goods for less than it cost to bring them to market. If the bounty does not repay to the merchant what he would otherwise have lost on the price of his goods, he would soon find a trade in which the price of his goods would cover this. Bounties are harmful since, over time, they force a country to trade in a way which greatly disadvantages it.
The average price of corn (wheat) has fallen considerably since the establishment of the bounty. But this happened in spite of the bounty, not as a consequence of it—as demonstrated in the case of France, where corn prices fell despite the fact that France had no bounties, although exportation of corn was subjected to a general prohibition until 1764. This gradual fall in the average price of grain is probably due to the gradual rise in the real value of silver; it would appear that bounties never contribute to lowering the price of grain.
In years of abundance, the bounty, by encouraging exportation, maintains corn prices in the home market above what they would normally fall to. Indeed, this was the objective. During years of scarcity, although the bounty is frequently suspended, the volume of exports during years of plenty in fact hinders the abundance of one year from relieving the scarcity of another. Consequently, bounties raise the price of corn in the home market during times of abundance as well as times scarcity.
Expansion of foreign markets through bounties always comes at a loss to the home market since commodities exported thanks to a bounty would otherwise not have been exported but would have remained in the home market, thus increasing home consumption and lowering the price of that commodity. Bounties impose two taxes on those using them: a tax on payment of the bounty and a tax on the resulting higher price of the commodity in the home market. In the case of corn, for example, since it is a commodity bought by the entire population, this tax is paid by each citizen.
In reality, the effect of a bounty is not so much that it raises the nominal value of corn, but rather that it decreases the value of silver, since the amount of silver that corn (or any other commodity, particularly home-produced) exchanges for is increased. The price of corn regulates that of all other such commodities. Consequently, corn also regulates the monetary price of labor, which must always be sufficient to enable a worker to purchase enough corn to maintain him and his family, be it in a liberal, moderate, or meager manner, depending on the current state of the society in which he lives.
With regard to encouraging the production of a specific commodity, a bounty on production is more effective than one on exportation since it lowers the price of the commodity in the home market. As such, the bounty, rather than imposing a second tax upon the population, reimburses them indirectly for what they contributed to the first tax. Bounties upon production were very rarely granted. The prejudices inherent to the commercial system led to a belief that national wealth is more directly related to exportation than production. As such, exportation has been favored as the more immediate means of bringing money into the country. It is a well-known fact that bounties on exportation have been abused over time, yet they are the most popular aspect of the mercantile system. I have known parties to agree privately amongst themselves to grant a bounty out of their own pockets upon the exportation of their goods. This method proved so successful that it more than doubled the price of their goods in the home market, notwithstanding a very considerable increase in the produce.
Something similar to a bounty upon production was nevertheless granted occasionally. The tonnage bounties for the white herring and whale fisheries are one such case. They tend to render the goods cheaper in the home market than they would otherwise be. In all other respects, their effects are the same as those of bounties upon exportation. These tonnage bounties result in a part of the country’s capital being employed in bringing goods to market, the price of which does not repay the cost, together with the ordinary profits of stock.
Although these tonnage bounties for fisheries do not contribute to a nation’s wealth, they contribute indirectly towards its defense, since they increase the number of sailors and shipping industries. As such, these bounties could be viewed as a cheaper means of contributing towards the nation’s defense than establishing and maintaining an official navy.
Despite these positive aspects, however, the legislature governing the granting of these bounties had some negative aspects too. Firstly, the herring shipping bounty was too great, and the herrings were sometimes cured using Scotch or foreign salt, both of which were delivered, free of excise duty, to the fish-curers. Secondly, the bounty for the white-herring fishery is a tonnage bounty, calculated in proportion to the ship’s cargo rather than the company’s diligence or success in the fishery industry, with the result that these companies were often more focused on obtaining the bounty than on operating conscientiously. Thirdly, the fishing method for which this tonnage bounty in the white herring industry was granted (by ships containing twenty to eighty tons of cargo) was not as well adapted to, for example, Scotland as it was to the Netherlands, the country in which this method originated. Fourthly, in many parts of Scotland, at certain times of the year herrings are a staple of the daily diet of many lower-income families. A bounty which lowered the price of herrings in the home market would significantly help these struggling families. But unfortunately the herring shipping bounty made no such contribution. Rather, it has ruined the fishery industry, which is by far the best adapted for the supply of the home market, with the additional bounty of 2s:8d per barrel for exportation resulting in the majority (over two-thirds) of the produce of the fishery industry going abroad.
A bounty is sometimes no more than a drawback, and consequently is not liable to the same objections as is a true bounty. The bounty, for example, upon refined exported sugar is a drawback of the duties upon the brown and Muscovado sugars from which it is made. Once the sugar has been refined and altered through manufacture, this drawback is called a bounty.
Don't get lost in the Wall Street Fee-Factory
It's taken us a few years to finally figure out the right mix of tools that get results and save money. If you click on the toolbox, you'll see an article we wrote that lays-out the brokers and research tools we personally use.
Get a free autographed copy of the Warren Buffett Accounting Book or Warren Buffett's Three Favorite Books. Simply submit your question to The Investor's PODcast. If your question gets answered on the air, the founders of this site, Preston Pysh and Stig Brodersen, will send you a free signed copy of their book!
Ask your question at the Buffett's Books money forum and interact with other smart investors like yourself. You won't find any day traders on this forum! Here's the link to The Warren Buffett Forum.